Stock Chartist

Commentary and recommendations about the stock market, sectors and individual stocks from a chartists perspective. Observations are based on the belief that "at their core, fundamentals are subjective but momentum is fact."

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May 17th, 2008

Don’t let the market’s action today fool you. The S&P 500 went up only 1.78, or 0.13% but it was still very important on several counts. But first, follow me on the chart below:

The key points are:

The Index itself just barely crossed over the 180-day moving average. This is the first time since December 10, 2007 (with the minor exception of December 24 and 26) that this has happened — 109 trading days or nearly a half a year. I discussed the relevance of this on May 15 in “What to Expect with a 180-day Moving Average Crossover“.

The 60-day crossed up over the 90-day moving average and is the first step in turning the corner on the way to a healthy bull market, something I discussed at length on May 2 in “Precursor to a Healthy Bull Market“.

Most significantly, because of the above crossovers, my back-tested Market Timing Indicator (MTI) gave an “all-in” signal, the first time the market gave us a green light since December 26!

As discussed in the previously referenced posting on what to expect when this happens, you should understand that the more market psychology turns positive (in other words, as more doubters are converted), the more favorable and stronger momentum becomes.

As a front page article in today’s Wall Street Journal entitled “Bernanke’s Bubble Laboratory” points out, market’s feed on themself. As I wrote in the above referenced article about the 180-day crossover, there’s a high probability based on stock market history for the Index to drop back below the 180-day moving average.

But the longer it avoids doing that, especially next week, the greater the probability that an even stronger bullish signal will be sent, the Index moving above the 300-day moving average. That’s a mere 1.6% stretch to 1448 (from today’s 1425.35 close). However, a move that high and that fast (in other words with the 60- and 90-day moving averages lagging so far behind) is only a remote possibility and has only occurred 7 times in the past 44 years! In 4 of the 7 times, the Index stayed above for less than a week and then reversed back to below.

But let’s not “count our chickens”. There’s a lot of work left to do, major hurdles to cross, and repair work to be down before we can consider risk to be very low. I’m not going to predict, I’m just going to listen to the market and let it give me the signals on its own at its own time. In the meanwhile, there are stocks that are lurching ahead and I listed several of them earlier.

I’m going to run my usual scans this weekend (new high lists, emerging industry groups, recent IPO’s) and will report back soon.

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